Treasuries, US Dollar Signaling Fed Tapering Sooner Than Later

If yields and the DXY continue in a northward trend in anticipation of the Fed removing the punch bowl, can the stock market continue its winning ways?

What happens in the minutes and hours following the release of the US non-farm jobs report today will likely be a great deal of "noise" that tends to part traders from their hard-earned money. The more important issue is what the data may mean to the Fed's tapering plans.

The narrative that traders seem to be grabbing onto is that the Fed is just itching to start its QE-tapering program -- it just needs a combination of strong data points and a benign political environment in the coming weeks and months in order to open the door to full-on tapering. While the latter is unlikely, a flow of strong data is certainly possible – although, so is a flow of weak data (given all the uncertainty surrounding Washington, DC, politics and upcoming events in that arena). This is why numbers like the non-farm payroll data Friday are so critical to the direction of things in the Treasury and currency markets.

Stocks have room to correct lower – but not much if the bulls are to remain in charge

The chart of the S&P (INDEXSP:.INX) e-Mini Futures contract (@ES) is shown below. The minis seem to have some reasonable support at 1,741 – 1,743 in the very short-term. If that level / range is broken, the next likely support level comes in at 1,722.35.

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Technical outlook for Treasury Yields

My charts tell me that the yield on the 10-year US Treasury Note seems to have made a fourth wave low at 2.467% back on 10/23 and then again on 10/30. The bounce that has occurred since the double bottom at 2.467% seems to be the first wave of a five wave sequence higher that will comprise the macro fifth wave of a larger five wave sequence.

In the short-term, yields may correct a little bit lower before proceeding higher once again. Support for this very short-term down move will come in at 2.598%, 2.574% and/or 2.550% from 2.613% currently. The first of those levels was tested Thursday during the peak of the risk-off trading. The eventual target for the macro fifth wave is a re-test of the highs from early September at 2.998% -- so shorting bonds (via instruments like the ProShares UltraShort Lehman 20+ Year ETF (NYSEARCA:TBT)) on any move in yields down to the support levels given above seems to be a high quality trade setup.

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Technical outlook for the DXY

Just as yields appear to have a little more correcting to do prior to another expected move up to the recent highs, the DXY also appears to have topped out at 81.09 intraday Thursday and tumbled back down to close just above the 80.75 level. If the late-day action Thursday is a bonified correction lower as I suspect, the first three downside targets will be 80.52, 80.23, and 79.94 -- all of which are meaningful Fibonacci retracements of the recent up move. Resistance now is set at Thursday's peak at 81.46.

So, I am looking for a bit more of a correction to the downside for DXY but then a healthy amount of additional upside once a new, higher floor is established.

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Summing it all up

If the projected chart patterns play out, we should see more modest, short-term pullbacks in the prices of the S&P e-Mini futures, Treasury yields, and the S&P futures. However, when those downsides play out way they should, we should see nice upside moves in stocks (5% - 6% higher by my Elliott Wave measuring techniques) as well as tradable moves in Treasury yields and the DXY.

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